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Case 2:33-av-00001 Document 9868 Filed 11/03/10 Page 1 of 38 PageID: 97279
SCOTT+SCOTT LLP BECKWITH & WOLF, LLP
CHRISTOPHER M. BURKE (214799) Carl Beckwith (CB 9044)
PENELOPE ABDIEL 1 Closter Commons #181
707 Broadway, Suite 1000 Closter, NJ 07624
San Diego, CA 92101 Telephone: 201-338-2833
Telephone: 619/233-4565 ccbeckwith@gmail.com
619/233-0508 (fax)
cburke@scott-scott.com
– and –
SCOTT+SCOTT LLP
JUDY S. SCOLNICK (JB 0827)
THOMAS L. LAUGHLIN IV
500 Fifth Avenue, 40th Floor
New York, NY 10110
Telephone: 212/223-6444
212/233-6334 (fax)
jscolnick@scott-scott.com
tlaughlin@scott-scott.com
Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
(NEWARK DIVISION)
BARBARA PHILLIPS and VETERANS AND Civ. No.
MILITARY FAMILIES FOR PROGRESS on
Behalf of Themselves and All Others Similarly CLASS ACTION COMPLAINT
Situated,
Plaintiffs,
DEMAND FOR A JURY TRIAL
vs.
PRUDENTIAL INSURANCE COMPANY OF
AMERICA and PRUDENTIAL FINANCIAL,
INC.,
Defendants.
Case 2:33-av-00001 Document 9868 Filed 11/03/10 Page 2 of 38 PageID: 97280
Dear Family Member,
When young Americans step forward of their own free will to serve, they do so with
the expectation that they and their families will be properly taken care of should
anything happen to them. That expectation is a sacred contract between the United
States of America and the men and women who bear our freedom upon their
shoulders. As President Lincoln said, our eternal commitment is to “care for him
who shall have borne the battle, and for his widow, and his orphan.”
Robert Gates, A Survivor’s Guide to Benefits, February 17, 2010, p. 2.
Individual Barbara Phillips and the 501(c) organization Veterans and Military Families for
Progress (“VMFP”) (collectively, “Plaintiffs”) by and through their attorneys, Scott+Scott LLP,
allege the following upon information and belief against the Defendants, Prudential Insurance
Company of America and Prudential Financial, Inc. (collectively “Prudential”):
PRELIMINARY STATEMENT
1. This case arises out of the predatory and unconscionable insurance practices
Prudential uses to misappropriate hundreds of millions of dollars worth of life insurance proceeds
that are properly due to the beneficiaries of fallen military service members and veterans.
2. Plaintiffs bring this nationwide class action against Prudential on their own behalf
and on behalf of a class of all others similarly situated, including all persons who were beneficiaries
of Servicemembers’ Group Life Insurance (“SGLI”), the Veterans’ Group Life Insurance (“VGLI”),
the Family Service Member Group Life Insurance (“FSGLI”) and the Traumatic Injury Protection
Insurance (“TSGLI”) and whose benefits were designated to be paid as “lump sum” and were instead
retained by Prudential in so-called Prudential “Alliance Accounts” from 1999 through the present.
NATURE OF ACTION
3. Recognizing the extraordinary risks and sacrifices inherent in military service, the
United States Government has created group life insurance programs supervised by the U.S.
Department of Veterans Affairs (“VA”) whereby policies are issued by private sector insurance
companies for the exclusive benefit of active service members, veterans and their families.
1
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4. Prudential has had an exclusive government-sanctioned monopoly since 1965 to
operate government-supervised1 group insurance programs, whereby the VA purchases group life
insurance from Prudential for the exclusive benefit of U.S. service members and veterans and their
survivors. Prudential is required to disburse the life insurance proceeds to the beneficiaries of the
fallen service members and veterans in accordance with the statutory and regulatory mandate
established by Congress and the implementing agency. See 38 U.S.C. §1966(a) and 38 C.F.R. §9.5.
5. Federal law requires that the life insurance proceeds be disbursed to the beneficiary in
accordance with the service member’s or veteran’s selection of one of two payment options: lump
sum disbursement of the full benefit, or payment of the benefit in 36 equal monthly installments.
38 U.S.C. §1970(d). The selection of payment options rests with the service member or veteran
who, presumably, is best situated to evaluate which payment option is most suitable for his or her
family’s needs. If no method is selected, the beneficiary may elect either lump sum payment or
payment in 36 equal monthly installments; if lump sum payment is selected, the beneficiary may
nonetheless elect 36 equal monthly installments.
6. It has come to light that Prudential violated these statutory and regulatory mandates
and abused its trusted position for its own financial gain to the detriment of the beneficiaries. Using
unconscionable practices and fraudulent misrepresentations, Prudential has systematically lined its
own pockets with interest earnings accrued on lump sum insurance benefits owed to families of
deceased service members and veterans.
1
This lawsuit does not involve any of the government-provided life insurance programs for the
military, such as United States Government Life Insurance, National Service Life Insurance,
Veterans’ Special Life Insurance, Veterans’ Reopened Life Insurance, Service-Disabled Veterans
Insurance and Veterans’ Mortgage Life Insurance. It encompasses only the government-supervised
programs that are government/private sector partnership operated, administered and managed by
Prudential.
2
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7. Rather than pay life insurance benefits to beneficiaries in accordance with federal law
and the election of the beneficiary, Prudential displaces the beneficiary’s choice, refuses to pay a
lump sum benefit and instead claims to pay lump sum benefits by way of an artifice that Prudential
trademarked as an “Alliance Account.”
8. Prudential represents to the grief-stricken family member of a service member or
veteran that the proceeds of the life insurance benefits for the deceased service member or veteran
have been “transferred” to an “Alliance Account,” and encloses an “Alliance Account welcome kit”
to explain the benefits. The Alliance Account welcome kit is riddled with fraudulent
misrepresentations and omissions. It states that the Alliance Account holds the insurance proceeds
in a safe and secure account segregated for the beneficiary, operates as a bank account, contains a
“checkbook” usable for disbursing or withdrawing funds and earns “attractive” or “competitive”
interest. In truth, each of these representations is false. The Alliance Account (a) is not a segregated
account exclusively for the beneficiary, (b) lacks the safety and security of FDIC insurance; (c) is not
a bank account; (d) the checkbook is not a checkbook, and (e) does not yield “attractive” or
“competitive” interest rates to the beneficiary. The funds in the so-called “Alliance Account” are
maintained in Prudential’s general corporate account where, undisclosed to the beneficiary,
Prudential invests the money on its own behalf in bonds and other investments. In 2010, these
investments provided Prudential with a return of approximately 4.1 percent, or more than eight times
as much as the paltry interest paid on money held in Alliance Accounts. .
9. Prudential takes every opportunity to steer the beneficiary away from taking the
proceeds all at once. This endeavor has the intended effect of accruing greater earnings for
Prudential to the immediate disadvantage and expense of beneficiaries. The life insurance benefits
that are the subject of this lawsuit provide beneficiaries with large cash infusions – currently set by
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Congress at $400,000. As Prudential knows, there are many reasonably safe investments2 available
to the beneficiaries that would earn them significantly higher returns. But as described herein,
Prudential uses its privileged position as the exclusive provider of insurance to the captive audience
of military families, as well as its control over the payment of proceeds, to dissuade beneficiaries
from investing life insurance proceeds for themselves. Prudential takes advantage of beneficiaries in
a time of unfathomable grief in the knowledge that the longer all or some of the purportedly lump
sum death benefits remain in the “Alliance Account,” the more ill-gotten profits Prudential receives.
As insurance professor Jeffrey Stempel stated, as quoted in an article in Bloomberg News, the
scheme is “turning death claims into a profit center.”
10. Moreover, under the ruse that Prudential is providing banking services to
beneficiaries, Prudential charges fees for certain services (“checks” returned unpaid; stop payments;
copies of individual checks or statements, herein referred to as “banking fees”). There is nothing in
the SGLI enabling statute or the regulations that gives Prudential the right to retain the beneficiaries’
benefits and then charge fees for the use of them. No banking services are provided that would
justify the imposition of such fees. This is merely another way Prudential earns profits off the back
of its misrepresentations to beneficiaries. For example, fees for “checks returned unpaid” makes the
assumption that Prudential has provided beneficiaries with checks to begin with, with all of the
flexibility that a regular checking account provides. Prudential further preserves to itself the
unilateral right to revise any of the terms and conditions, including interest rate, whenever
Prudential, in its sole discretion, deems necessary.
2
According to Bankrate.com, as of the time of this complaint, the average one-year certificate of
deposit yielded 1.08 percent, more than double the interest paid on an Alliance Account.
4
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11. Prudential’s illegal conduct is made more egregious because it is marketed as a
patriotic service to beneficiaries of the insurance. As reported in The New York Times, a
spokesperson of Prudential recently crowed: “[w]e don’t consider this a business; it’s more of a
service.”
12. Prudential justifies its scheme as standard industry practice. But in fact, Prudential is
exploiting its special relationship with the beneficiaries to squeeze profits from them in
contravention of a duty to act in their interest. Prudential’s profiteering machine takes advantage of
service members’ families in their most vulnerable time. Defendants’ ill-gotten gains are taken as
beneficiaries leave all or some of their money in Alliance Accounts while they are grieving the loss
of their loved ones. In their state of bereavement these beneficiaries do not, reasonably, suspect
fraud or mistrust the entity promising to safe-guard their insurance proceeds. This is especially true
because Prudential is acting under the auspices of a government insurance program and administers
the program through the official sounding Office of Servicemembers’ Group Life Insurance
(OSGLI).
13. By operation of its fraud, Prudential owes Plaintiff Phillips the full amount of interest
earned on her “Alliance Account.” Moreover, Prudential owes hundreds of millions of dollars in
wrongfully misappropriated investment income to the Class of grieving families of fallen soldiers
and veterans. Furthermore, Prudential’s exploitative practices must be enjoined so that future
beneficiaries will not be misled into acting against their own economic interest.
14. This action seeks disgorgement of Prudential’s ill-gotten gains, restitution, damages,
treble damages, exemplary damages, attorneys’ fees, costs and declaratory and injunctive relief
against Prudential.
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THE PARTIES
15. Plaintiff, Barbara Phillips, a resident of Alabama, is the grandmother of Andrew
Chris, an Army Ranger who was killed in Iraq by an improvised explosive device in 2003. Plaintiff
was the named beneficiary of the SGLI policy for the amount of $250,000 taken by her grandson.
Upon her grandson’s death, Plaintiff elected to take the SGLI proceeds as a lump sum payment.
From August 15, 2003 until 2006, when Plaintiff closed the Alliance Account, Plaintiff earned the
limited interest that Prudential unilaterally paid her while Prudential enriched itself by investing the
insurance proceeds for its own benefit. In 2006, upon realizing the low interest rate she was
receiving, Barbara Phillips requested that Prudential pay her the lump sum as she had initially
elected upon her grandson’s death in 2003. Plaintiff has been injured, and has suffered an
ascertainable loss as a result of Prudential’s false, deceptive, misleading, unfair and unconscionable
practices, and as a result of Prudential having breached its contract with the United States
Government and violated its obligations under 38 U.S.C §1970 and breached its fiduciary duties to
the Plaintiff, Plaintiff has been injured in a manner common and typical of other Class members.
16. Plaintiff Veterans and Military Families for Progress (“VMFP”) is a 501(c)(4)
organization dedicated to grass-roots advocacy for the rights and needs of veterans, military service
members and their families. Founded in 2005, VMFP seeks to advance the interest of veterans,
military service members (including active-duty, Guard and Reserve) and military families, and to
ensure that their needs are understood by the American public, endorsed by elected officials, and
protected by legislation, regulation, and public policy initiatives. VMFP is an effective organization
that has witnessed 27 of its proposed national pro-veteran/military families bills become law since its
inception. Membership in VMFP is open to all veterans, military service members and their families
on a nationwide basis.
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17. Prudential’s administration of SGLI as described herein is directly and concretely
harmful to military families who have suffered the loss of a service-member or veteran and been
forced to receive lump sum payments of SGLI due them by Prudential’s self-serving “Alliance
Accounts.” Because VFMP is dedicated to protecting military families from exploitation and some
of its’ members have been exploited by Prudential, VMFP seeks injunctive and declaratory relief to
enjoin this harmful conduct and prevent it from continuing. Because the mission of the VMFP and
the interest of the individuals and families it serves are perfectly aligned with the injunctive and/or
declaratory relief sought in this complaint, VMFP is fit to serve as a representative in this class
action. Moreover, VMFP’s participation in this action will further the interests of the class by
bringing to bear VMFP’s broad experience with the unique rights and needs of service-members,
veterans and military families.
18. Defendant Prudential Insurance Company of America is a corporation incorporated
under the laws of the state of New Jersey which does business throughout the United States of
America; its principal place of business is 751 Broad St., Newark, NJ 07102. Prudential has been
the sole operator of the SGLI program since its inception in 1965, the VGLI program since its
inception in 1974, the FSGLI since its inception in 2001 and the TSGLI since its inception in 2005.
To administer the policies, Prudential established the Office of Servicemembers’ Group Life
Insurance (“OSGLI”), which is located at 80 Livingston Avenue, Roseland, NJ 07068.
19. Defendant Prudential Financial, Inc. is the parent of the Prudential Insurance
Company of America. Based on this relationship, Plaintiff alleges that Prudential Financial, Inc. is
able to exercise control over the policies and procedures of the Prudential Insurance Company of
America.
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JURISDICTION AND VENUE
20. The subject matter jurisdiction of this Court is invoked pursuant to 28 U.S.C. §§1331
and 1361, 9 C.F.R. §9.13 and 28 U.S.C. §1367(a) for claims arising under the New Jersey Consumer
Fraud Act, N.J.S.A. 56:8-1 to 20 , based on supplemental jurisdiction over claims that arise from a
common nucleus of operative fact and are so intertwined with other matters pending before the Court
as to make exercise of supplemental jurisdiction appropriate.
21. The Court has the authority to grant declaratory relief pursuant to the Declaratory
Judgment Act, 28 U.S.C. §2201 et seq.
22. This Court possesses personal jurisdiction over Prudential based on its residence,
presence, transaction of business and contacts within the United States, New Jersey and this District.
Prudential’s headquarters are within this District.
23. Venue is properly vested in this Court pursuant to 28 U.S.C. §1391(c) because the
Defendant, Prudential has its headquarters within this District.
SUBSTANTIVE ALLEGATIONS
A. History of SGLI and VGLI Insurance
24. The origins of Servicemembers’ Group Life Insurance (“SGLI”) date back to the
Vietnam War. As the armed forces began to suffer significant casualties, private life insurance
companies were unwilling to underwrite the coverage for members of the service. This created the
need for a government-sponsored life insurance program to cover service members placed in harm’s
way.
25. Although they were not able to meet the insurance needs of the armed forces, private
insurers lobbied for a role in providing coverage, and wanted to prevent the Government from
providing coverage indefinitely after service members separated from the service. As a result, in
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1965 Congress created SGLI, a public/private partnership whereby group coverage is administered
by the commercial insurance industry, and supervised by the Government. Congress’ intent in
enacting SGLI was to benefit U.S. service members.
26. In order to make life insurance for service members available through a commercial
carrier at a reasonable rate, notwithstanding the special mortality risks that service members often
must assume, Congress undertook to subsidize the program. Under 38 U.S.C. §1966, the Secretary
of Veterans Affairs was authorized and required to purchase from private insurance carrier or
carriers, a group life insurance policy for the benefit of service members.
27. Prudential was selected to be the successful bidder for the government contract at the
inception of SGLI in 1965 and has held that coveted position ever since.
28. Prudential administers SGLI policies from the so-called Office of Servicemembers’
Group Life Insurance (“OSGLI”) located in Roseland, NJ. Although the OSGLI appears to be an
integral part of the United States Department of Veterans Affairs, OSGLI is in reality a division of
Prudential and a completely private entity.
29. The premium cost for the SGLI policy is shared by the member and the Government.
The member pays the normal cost of the insurance and the Government pays the extra cost for
special mortality risks. The service member’s portion of the costs is deducted from the service
member’s pay or otherwise collected from the member of the uniformed service. Premium payments
for VGLI may be made to the OSGLI by direct remittance from the veteran, by allotment from
military retirement pay, or as a deduction from VA disability compensation benefits.
30. The United States, not the service member, is the policyholder. Pursuant to 38 U.S.C.
§1972, each member insured under a group insurance policy receives a certificate setting forth the
benefits to which the member is entitled, to whom such benefit shall be payable, the payment or
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settlement option selected by the service member and a summary of the policy provisions principally
affecting the member.
31. Prudential’s insurance contract with the VA is required to comply with the federal
mandate. The original contract was entered into in 1965 and was thus, under both the 1965 and was
amended in 2007. Under both contracts between Prudential and the VA and pursuant to 38 U.S.C.
§1970, Prudential is required to provide payments, upon election of the survivor, in only one of two
ways: (a) a lump sum payment; or (b) 36 monthly installments. Prudential’s responsibilities in
disbursing SGLI benefits are set out in its contract with the Department of Veterans Affairs, and
38 U.S.C. §1970 and 38 C.R.F §9.5 which provide in relevant part:
38 U.S.C. §1970
(a) Any amount of insurance under this subchapter in force on any member or former
member on the date of the insured’s death shall be paid, upon the establishment of a
valid claim therefore, to the person or persons surviving at the date of the insured’s
death . . .
* * *
(d) The member may elect settlement of insurance under this subchapter either in a
lump sum or in thirty-six equal monthly installments. If no such election is made by
the member the beneficiary or beneficiaries may elect settlement either in a lump
sum or in thirty-six equal monthly installments. If the member has elected settlement
in a lump sum, the beneficiary or beneficiaries may elect settlement in thirty-six
equal monthly installments.
38 C.R.F §9.5
Proceeds shall be paid in accordance with provisions set forth in 38 U.S.C. §1970
and the following provisions:
(a) If proceeds are to be paid in installments, the first installment will be payable
as of the date of death. The amount of each installment will be computed so as to
include interest on the unpaid balance at the then effective rate.
32. Thus, upon the death of the covered service member, Prudential is contractually and
legally required to disburse benefits to the person designated by the deceased service member or
veteran as a beneficiary, in only one of two ways: as either a lump sum payment or as 36 equal
monthly installments, depending on the service member’s or beneficiary’s chosen preference.
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33. Since its inception, Congress has amended SGLI numerous times, keeping intact
virtually all aspects of the program (including allowing only two payment options), but expanding
the categories of military personnel covered by it and increasing the amount of the benefit. The
SGLI program now offers low-cost group life insurance for service members on active duty, ready
reservists, members of the National Guard and ROTC while engaged in authorized training duty,
members of the Commissioned Corps of the National Oceanic and Atmospheric Administration and
the Public Health Service, cadets and midshipmen of the four service academies, and members of the
Reserve Officer Training Corps. The maximum coverage under the program since September 1,
2005 has been $400,000.
34. On June 5, 2001, Public Law 107-14 was enacted creating the Family SGLI Program
(“FSGLI”). FSGLI allows a service member’s spouse and children to be covered with life insurance
under the SGLI program if the service member is in active duty or a member of the Ready Reserve
of a uniformed service. Maximum coverage is $100,000 for a spouse and $10,000 for each child.
35. On May 11, 2005 Public Law 107-13 was enacted establishing Traumatic Injury
protection insurance under the SGLI program, effective December 1, 2005. Under this program,
known as TSGLI, insured service members are eligible to receive from $25,000 to a maximum of
$100,000 after suffering a qualifying traumatic injury, depending on the severity of the injury.
36. In order to help service members maintain insurance coverage during their transition
to civilian life, the Veterans’ Group Life Insurance (“VGLI”) program was established by Public
Law 93-289 in 1974 to cover veterans who were recently separated from service. Like the SGLI
program, successive amendments to the VGLI statute continued to expand the coverage and increase
the payouts under the program. The benefit structure under VGLI matches that of SGLI. Therefore,
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the current maximum benefit under VGLI is $400,000, like that for SGLI. By legislation enacted in
1992, VGLI insurance has been made indefinitely renewable as a term insurance policy.
37. SGLI, VGLI, FSGLI and TSGLI (“Four Programs”) are all governed by 38 U.S.C.
§1965 et seq. and 38 C.F.R. §9.1 et seq. These laws and regulations reflect the federal government’s
strong interest in providing its service members, veterans and their beneficiaries with uniform and
protective life insurance policy benefits as well as the related benefits of life insurance for the
service member’s spouse, children and insurance payable upon traumatic injuries sustained by the
service member in combat.
38. Service members are automatically covered for the maximum amount of SGLI
insurance ($400,000) on his or her first day of active duty or active duty for training, and are
strongly discouraged from opting out of the coverage entirely or of taking less than the maximum
coverage. In fact, service members may only reduce coverage after having been counseled and
provided with information that includes:
a. the purpose and role of life insurance in financial planning;
b. the difference between term life insurance and whole life insurance;
c. the availability of commercial life insurance; and
d. the relationship between Servicemembers’ Group Life Insurance and
Veterans’ Group Life Insurance.
38 U.S.C. §1967 (d).
39. On information and belief, at least 90% of beneficiaries elect to receive the SGLI
benefits as a lump sum. In 2009, the SGLI/VGLI program covered approximately 6 million soldiers
and their families.
40. Since its inception in 1965, Congress continued to add protections to the SGLI/VGLI
program to ensure that only the beneficiary of the fallen service member, and no other person or
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entity, obtain the full amount of the SGLI/VGLI benefit payout. Section 770(g) exempts the policy
proceeds “from the claims of creditors.” Moreover, it prohibits in the broadest of terms, any
“attachment, levy or seizure by or under any legal or equitable process whatever,” whether
accomplished “either before or after receipt by the beneficiary.” The benefits are not subject to any
state or federal tax. Payment never escheats to the state, even if all principal and contingent
beneficiaries should die before all 36 installments have been paid. 38 C.F.R. §9.5(e). All these
protections apply to the benefits under FSGLI and TSGLI as well.3
41. The United States Supreme Court in Ridgway v. Ridgway, 454 U.S. 46 (1981)
recognized the strong governmental interest in providing life insurance for its service members, no
matter how hazardous their duty:
Possession of government insurance, payable to the relative of his choice, might well
directly enhance the morale of the serviceman. Ridgway v. Ridgway, 454 U.S. 46, 56
(1981). The end is a legitimate one within the Congressional powers over national
defense, and the means are adapted to the chosen end.
42. In legislation enacted on September 30, 2006, with the Military Personnel Financial
Services Protection Act (“MPFSPA”) Congress reiterated its interest in ensuring “the brave men and
women in uniform are offered first-rate financial products in order to provide for their families and
save and invest for retirement.” Pub. Law 109-290 §2(2), 10 U.S.C. §992. The MPFSPA was
designed to curtail unscrupulous practices in the sale of insurance and investment advisor-services
on military installations worldwide. Among the many sanctionable practices the MPFSPA was
designed to eliminate is the practice of some unsavory companies to hide unfavorable disclosures
pertaining to the life insurance product. Thus, the Act requires all disclosures relating to life
3
The VA’s website indicates that the U.S. Internal Revenue Service has also determined that
TSGLI benefits are not taxable.
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insurance to be “in plain and readily understandable language and in a type font at least as large as
the font used for the majority of the solicitation material.” Id. Sec. 10(b)(6).
43. The MPFSPA specifically does not apply to “any life insurance product specifically
contracted by or through the Federal Government” – which are the four insurance products
administered by Prudential. Id. Sec. 10(e). Presumably the Four Programs were excluded from the
MPFSPA because Congress believed there was sufficient assurance that Prudential would never
engage in such reprehensible practices as misrepresenting its life insurance product to America’s
service members, since Prudential was being supervised by the VA and Prudential was obligated
pursuant to statute, regulation and contract to adhere to the law.
44. On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief
Tax Act (HEART Act, H.R. 6081). The HEART Act allows beneficiaries of SGLI life insurance
benefits to contribute those funds to a Roth IRA or Coverdell Education Savings Account without
regard to the ordinary income limits or contribution limits. The HEART Act allowed such limitless
contributions on life insurance benefits paid between October 7, 2001 and June 17, 2008 if they were
rolled over no later than June 17, 2009. Beneficiaries have one year to rollover contributions related
to deaths occurring after June 17, 2008. The tax benefits provided by this roll over option provides
significant economic benefits for life insurance beneficiaries.
B. Prudential Has Abused Its Position by Retaining Life Insurance Benefits that It
Was Required to Pay Out
45. From 1965 until 1999, Prudential honored its obligations to pay beneficiaries
pursuant to the statutory and regulatory mandate and its contractual obligations with the VA.
46. At some point around 1999, approximately three years after the coverage limit was
raised to $200,000, Prudential ceased paying lump sum benefits as required under SGLI and VGLI
and began to implement a scheme to subvert the mandate of federal law and breach its contract with
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the VA, by way of the ruse of “Prudential Alliance Accounts.” In connection with this change,
Prudential made a misleading presentation to the VA in which it represented that “at no time will the
interest [on an Alliance Account] fall below our guaranteed minimum of 2%.” According to
Bloomberg News, Prudential concealed many other aspects of the Alliance Program from the VA.
Stephen Wurtz, the deputy assistant director for insurance at the VA and the individual who has
overseen the insurance program for twenty-five years, believed that money kept in Alliance
Accounts was kept in banks, where it would be insured by the FDIC. When Wurtz learned that
Prudential actually kept the payouts in its general account for its own use, Wurtz asked Prudential
how much money it earned, but Prudential would not provide this information. Wurtz explained that
he did not understand until 2010 that Prudential was taking advantage of their role administering
federal insurance programs to “bloodsuck” money from beneficiaries.
47. When Congress implemented the FSLGI and TSGLI programs in 2001 and 2005,
respectively, Prudential continued to use the same unlawful payment method of the Alliance
Account for payout of FSGLI and TSGLI benefits.
48. To delay the payment of the full benefit owed and misappropriate some or all of such
benefits for its own gain, Prudential altered the “lump sum payment” option mandated by 38 U.S.C.
§1970(d) so that instead of paying the benefit to the SGLI or VGLI beneficiary all at once,
Prudential would inform the survivor that it was placing the benefit in a “Prudential Alliance
Account,” which was purportedly an interest-bearing account in the name of the individual
beneficiary.
49. A service member makes his selection of SGLI beneficiary and method of payment
on an Application Form 8286, a copy of which is attached to this Complaint as Exhibit A. Form
8286, in compliance with 38 U.S.C. §1970 lists the only payment options to be “lump sum or 36
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equal monthly payments.” There is no reference to an Alliance Account as a permissible method of
payment.
50. Upon the death of a service member, the beneficiary receives the SGLI 8283 Claim
Form for Death Benefits (“Claim Form”) to be signed and sent to Prudential in order to receive
benefits. A copy of SGLI Form 8283 is attached as Exhibit B to this Complaint. The Claim Form
contains an option for beneficiaries to choose a lump sum or installment option for the receipt of
their SGLI benefits, if the service member has not otherwise elected an option. The Claim Form,
Exhibit B, like the Application Form 8286, Exhibit A, contains no mention or option for an Alliance
Account to be used to hold the benefits.
51. If a beneficiary chooses a lump sum (or the deceased service member had already
elected that option for the beneficiary), Prudential sends the beneficiary a bereavement cover letter
and what Prudential calls an “Alliance Account welcome kit” that advises the beneficiary that “the
money [from your service member’s life insurance] has been transferred into Prudential’s Alliance
Account® in your name” The letter states that a convenient “interest-bearing” account has been set
up on the beneficiary’s behalf to hold the funds supposedly to allow the beneficiary time to decide
how to use the benefit. There is no indication in the body of the letter that the Alliance Account is
not a real bank account. Attached as Exhibit C to this Complaint is a copy of Prudential’s standard
“bereavement letter.”
52. Prudential has not transferred the lump sum to beneficiaries either in fact, or as a
matter of legal ownership. Prudential intends to have beneficiaries believe that their funds are safely
deposited in a bank account in their own name. They are not. Instead, Prudential retains use of the
funds in its general corporate account. This account is not subject to banking regulations, let alone
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insured by the FDIC. The funds for each individual beneficiary are not separated from each other, or
from Prudential’s corporate funds.
53. Included in the Alliance Account welcome kit is a so-called “checkbook.”
Beneficiaries are told in the bereavement letter that the checkbook can be used to withdraw and
disburse funds from the Alliance Account in any amount of $250 or more.
54. The checkbook is not a checkbook at all. Each “check” contains the same elements
as a check, including the name of the bank out of which the funds will be paid; giving the impression
that the funds are already in an account, and ready to be withdrawn to cover debts. Prudential even
represents in their “Frequently Asked Questions” portion of the OSGLI website:
http://www.insurance.va.gov/sgliSite/SGLI/sgliFaq.htm:
An Alliance Account is an interest bearing draft account with an account book
similar to a checking account. An Alliance account is opened for SGLI and VGLI
beneficiaries. Insurance proceeds are deposited in the beneficiary’s name and the
beneficiary can write drafts for any amount up to the full amount of the proceeds.
This gives the beneficiary time to make important financial decisions, while their
funds are secure and earn continuous interest.
55. In actuality, an Alliance Account is not similar to a draft account. It is not a bank
account at all, and withdrawals cannot be made using the checkbook. Death benefits and interest
accrued upon the death of a service member are co-mingled in Prudential’s generate corporate
account.
56. The checks are not linked to an “account” and cannot be used as currency with
retailers or other commercial entities who accept checks as payment. The checks are simply “IOU”
notes or drafts that have no exchange value in and of themselves. Beneficiaries are not informed that
the notes are not usable at retailers, like regular checks linked to a checking account. In order for
beneficiaries to receive funds, they must write out a note and wait for Prudential to approve it and
disburse the funds.
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57. Prudential describes in its bereavement letter that the Alliance Accounts are “interest-
bearing” and describes the interest rate as “attractive” or “competitive,” or the “going rate” for a new
account. Prudential determines the rate of interest entirely unilaterally. At no time does Prudential
meaningfully disclose to beneficiaries that (a) the funds are not held in any separate bank account;
(b) that Prudential unilaterally determines the beneficiaries’ rate of interest; (c) that Prudential is also
making interest on the benefits; or (d) that Prudential may make up to ten times the rate of interest
that it pays to beneficiaries.
58. Prudential has a policy of dissuading beneficiaries of lump-sum benefits from taking
the entire policy as a lump sum. Prudential actually encourages beneficiaries to keep the proceeds
with Prudential as long as possible, warning beneficiaries that “[i]mportant financial decision -- even
under the best of circumstances – should not be made quickly.” Prudential’s every communication
to beneficiaries implies that it acts only in the beneficiary’s best interest. At no time does Prudential
inform beneficiaries that it has a financial interest in keeping the funds for as long as possible, and
paying them out as slowly as possible.
59. Prudential buries any reference to beneficiaries’ option to withdraw their benefits in
an actual lump sum payment, the form of payment required by law, among the various misstatements
described herein. This practice evinces an intention to confuse beneficiaries about their rights and
demonstrates Prudential’s repeated efforts to advance its own interest at the expense of those to
whom it had a duty to protect.
60. Prudential also intentionally omits from any communications with beneficiaries that
they have an option under the HEART Act to roll over SGLI benefits into Roth IRA and Coverdell
Education Saving accounts. These rollover benefits conferred under the HEART Act are only valid
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for one year and potentially provide beneficiaries with significant tax benefits. Prudential puts its
own interest above those of the beneficiaries by unreasonably omitting these facts.
61. Included in the Alliance Account welcome kit is a three-page document called a
“Guide to Features and Benefits that explains how the account works.” Attached as Exhibit D to this
Complaint is the three-page Guide. Prudential affirmatively misleads the beneficiary into believing
that the monies in the Alliance Account are safe and secure. It states in large font under the heading,
How Safe is My Money?:
Your money – and all accrued interest are backed by The Prudential Insurance
Company of America, one of the largest life insurance companies in North America.
Then, in extremely small font at the bottom of the page that Prudential does not intend the
beneficiary to read is the statement: “[a]ccount balances are not insured by the Federal Deposit
Insurance Corporation (FDIC).” This classic tactic of placing unfavorable information regarding life
insurance in small type font is precisely the type of misleading and unconscionable conduct that
Congress specifically condemned in the 2006 legislation, MPFSPA.
62. Exhibit D proclaims, without any authority, and contrary to 38 U.S.C. §1970 and
38 C.R.F §9.5, that “The Prudential Company of America reserves the right to revise Terms and
Conditions as necessary.” Prudential does not specify which terms and conditions it retains
unilateral right to alter, but clearly it is intended to include the interest rate paid to the beneficiary.
In contravention to its statutory, regulatory and fiduciary duties, Prudential states that “the interest
rate may change periodically, but not more than monthly.”
63. Prudential’s misrepresentations or omissions of material facts necessary to make the
representations truthful include: (a) misstating that the Alliance Account creates an “account” and
segregates funds for the beneficiary’s sole and exclusive use; (b) misstating that the Alliance
Account funds are safe and secure and implying they are as secure as if they were held in a bank;
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(c) misstating that the IOUs that are made to resemble checks are “checks,” (d) misstating that
interest earned by the beneficiary is “attractive” or “competitive”; (e) failing to tell the beneficiary
that Prudential is taking the lion’s share of the interest earned on the accounts; (f) failing to inform
the beneficiary of their time-sensitive rollover benefits under the HEART Act; (g) failing to inform
the beneficiary that even a conservative investment of the lump sum could net a better interest rate
than Prudential was paying; (h) failing to inform the beneficiary that Prudential has no right to
change the terms of the Alliance Account, or indeed to issue an Alliance Account; and (i) failing to
clearly inform beneficiaries that beneficiaries have the right to immediate and automatic payment of
the full amount of their SGLI benefits upon the death of the service member by way of a check from
Prudential, without having to further request such payment, “withdrawing” the money or waiting for
a “check” to clear.
64. Thus, by abusing its privileged position as the sole issuer and administrator of a
federally mandated insurance program, Prudential has deceived the families of deceased service
members and veterans into leaving life insurance benefits in Alliance Accounts that are less safe and
less lucrative than the investment options that would be available if Prudential complied with federal
law and simply paid out life insurance benefits directly in a lump sum.
65. By setting up the ruse of an Alliance Account that is nothing more than a subterfuge
for retaining benefits in Prudential’s general corporate account for as long as possible to take interest
income for itself, Prudential has deprived the families of fallen service members and veterans, a
group on whom Congress has understandably conferred special protections, of their entitlement to
the full value of a lump sum payment and has preyed on military families at their most vulnerable
moment. Upon information and belief, at least through September 1, 2009, Prudential’s scheme also
violated the terms of Prudential’s insurance contract with the VA since both the 1965 and 2007
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insurance contracts required Prudential to make lump-sum payments to survivors who requested
them and did not mention the retained asset system known as Alliance Accounts.
66. On September 1, 2009, Prudential and the VA amended the insurance policy contract
to formally allow Prudential to divert survivors’ money into Alliance Accounts. This amendment is
void since all provisions of the contract between the VA and Prudential are required to comply with
38 U.S.C. §1970. Thus, Prudential’s scheme continued to violate the mandate of 38 U.S.C. §1970,
38 C.F.R. §9.5 and its fiduciary duty to survivors.
67. Through the misconduct described herein, Prudential has unjustly enriched itself.
Prudential holds the money purportedly placed in Alliance Accounts in its own general account and
invests the money on its own behalf, mostly in bond investments. These investments pay Prudential
far higher yields than the interest Prudential pays to the SGLI/VGLI beneficiaries holding their
money in so-called Alliance Accounts. For example, as of June 30, 2010, Prudential held about
$662 million of beneficiaries’ money in its corporate account. This $662 million sitting in
Prudential’s corporate account was comprised of life insurance benefits due and owing to
beneficiaries of deceased service members and veterans. At the same time that Prudential was
holding the $662 million in its corporate account, Prudential was telling each beneficiary that his
benefits were being safely invested on his own behalf in a separately segregated “Alliance Account”
set up just for the beneficiary’s exclusive interest. In 2009, Prudential earned 4.2% overall on all its
investments in its general corporate account, suggesting that Prudential is earning about $28 million
a year off the pool of approximately $662 million that belonged to the SGLI and VGLI beneficiaries.
68. In 2010, Prudential paid survivors holding Alliance Accounts 0.5% in interest, or
about $3 million dollars (0.5% X 662 million) at an annualized rate. Subtracting the $3 million in
interest that was actually paid to the beneficiaries from the $28 million that Prudential earned
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through its investments, and wrongfully misappropriated for itself, leads to a net profit of
approximately $25 million a year that belong to the SGLI and VGLI beneficiaries.
C. Statute of Limitations Has Been Tolled by Equitable Estoppel and Fraudulent
Concealment
69. Prudential has actively and intentionally concealed the nature of its Alliance Accounts
by failing to inform beneficiaries that, inter alia, Alliance Accounts are not separate or in any way
real bank accounts. Prudential has not now, nor in the past, informed beneficiaries that the
checkbooks they received are not usable as actual checks, nor are they linked to any account.
Prudential has secreted from beneficiaries the fact that it is earning interest off SGLI benefits and
clearly has not disclosed the extent of those earnings. Beneficiaries of the SGLI could not at any
time have discovered the fraudulent nature of Prudential’s misrepresentations or omissions using
reasonable due diligence. Beneficiaries have no access to Prudential’s internal records, nor any way
of discovering the true nature of the fund in which their benefits were kept.
70. Prudential held itself out to service members, veterans and their families, in their
written communications with beneficiaries, and websites as if it were an arm of the United States
Veterans Affairs. Given the trust with which Prudential was clothed by the VA, beneficiaries had no
reason to question the information Prudential provided them and had no basis on which to suspect or
allege that they were being taken advantage of. Moreover, Defendants have concealed the true facts
regarding their practices to beneficiaries, who in a state of bereavement over deceased loved ones,
are in no position to scrutinize the representations of Prudential. In the totality of the circumstances,
beneficiaries were an easy target precisely because of their vulnerability and the improbability of
being able to expose the ruse inflicted upon them.
71. Even Defense Secretary Robert Gates was ignorant about Prudential’s unlawful
scheme. Gates recently told Bloomberg News, “Until today, I actually believed that the families of
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fallen heroes got a check for the full amount of their benefits. This case was news to me.” If the
Defense Secretary was unable to discern the fraud, Plaintiff and Class members, even with the
exercise of reasonable inquiry could not be expected to know how Prudential breached its fiduciary
duties toward them and violated the law.
72. Defendants’ conduct was and is, by its nature, self-concealing. Still, Defendants,
through a series of affirmative acts or omissions, suppressed the dissemination of truthful
information regarding their illegal conduct, and have actively foreclosed Plaintiff and Class members
from learning of their illegal, unfair and/or deceptive acts.
73. By reason of the foregoing, the claims of Plaintiff and Class members are timely
under any applicable statute of limitations, pursuant to the discovery rule, the equitable tolling
doctrine, and fraudulent concealment.
D. The Truth Revealed
74. On July 28, 2010, Bloomberg News published an investigative report revealing
Prudential’s unconscionable conduct toward SGLI and VGLI beneficiaries. This was the first public
disclosure of Prudential’s misconduct.
75. In response, numerous public officials have expressed outrage and initiated
investigations of Prudential’s conduct.
76. For example, the Attorney General for the State of New York (“NYAG”) has initiated
a “major fraud investigation” into Prudential’s life insurance policies. In a press release on July 29,
2010, the NYAG stated that: “[i]t is shocking and plain wrong for these multi-national life insurance
companies to pocket hundreds of millions in profits that really belong to those who have lost family
members and have already suffered immensely.” The NYAG further noted that “[i]t appears that the
substantial interest earned on [Alliance Accounts] mostly benefit and enrich the insurers at the
expense of the families to whom the money really belongs. And beneficiaries are not adequately
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informed by insurers of the details of these accounts including the fact that the insurers are making
huge profits at the expense of the grieving family.”
77. Congressman Bob Filner (D-CA), the Chairman of the House Veterans Affairs
Committee, condemned Prudential’s action as “disgusting” while Congressman Walter Jones (R-
NC) requested a hearing on the matter, stating “I was deeply troubled when I heard of the manner in
which insurance companies had allegedly financially benefited from the funds provided by the US
Government to our fallen service members’ families.”
78. On September 15, 2010, in response to the public outcry, the U.S. Department of
Veterans Affairs publically announced that it would require Prudential to make some changes with
regard to the Alliance Accounts. The changes announced by the VA are the following:
a. Payment options will be clarified so beneficiaries understand they can
receive a lump-sum check or have the money deposited into an
Alliance Account. Beneficiaries also can choose to receive payments
in 36 monthly installments.
b. Frequently asked questions, website information and handbooks will
be modified to clearly explain the Alliance Account.
c. Prudential will follow up with beneficiaries whose accounts remain
open after six months to ensure families understand the terms of the
account.
d. Beneficiaries will be encouraged to use a free financial-counseling
service.
e. There would be greater transparency that OSGLI was actually a
private company and not a part of the U.S. Government.
79. All of the changes announced by the United States Veterans Affairs to the SGLI and
VGLI programs were voluntarily undertaken in response to the public outcry and there is no court
order to preclude Prudential from reverting to its former policies with regard to the administration of
the Four Programs, SGLI, VGLI, FSGLI and TSGLI.
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E. Prudential’s Position of Trust and Confidence
80. Pursuant to 38 U.S.C. §1966, the U.S. Government has entrusted Prudential with the
role of providing group life insurance to the nation’s service members and veterans. Prudential is the
sole primary issuer of SGLI, VGLI, FSGLI and TSGLI insurance and administers these programs
through the OSGLI.
81. Reflecting Prudential’s privileged and entrusted position vis-à-vis SGLI, VGLI,
FSGLI and TSGLI, the VA’s website directs service members and veterans having questions about
these programs to contact Prudential. There is virtually nothing on OSGLI’s website to distinguish it
from a website for the U.S. Veterans Affairs. Through OSGLI, Prudential communicates with
service members and veterans about SGLI, VGLI, FSGLI and TSGLI and as such, acts as the face of
the U.S. Government to the service member and veteran.
82. Prudential writes and provides forms for service members and their families to use in
connection with SGLI, VGLI, FSGLI and TSGLI. The service members and their families are a
captive audience since Prudential has a government-sanctioned monopoly over administration of the
SGLI program. The Servicemembers’ and Veterans’ Group Life Insurance Handbook that can be
downloaded from the OSGLI’s website that describes the programs appears to be a U.S. Government
booklet that is actually prepared by Prudential.
83. Prudential’s exclusive position cloaks its statements in the vestiges of government
authority and beneficent purpose, strengthening Prudential’s ability to manipulate SGLI and VGLI
members and their families. By virtue of this relationship, and its obligation to adhere to the
statutory and regulatory obligations under 38 U.S.C. §1965 et seq. and 38 C.F.R. §9.1 et seq.,
Prudential is a fiduciary of SGLI and VGLI beneficiaries and those service members who are
entitled to receive FSGLI and TSGLI benefits. Prudential owes duties of full disclosure, loyalty and
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candor to beneficiaries of SGLI and VGLI proceeds and to the nation’s service members who are
entitled to receive FSGLI and TSGLI benefits.
84. Therefore, all monies that are actually held in Prudential’s general account but were
misleadingly designated by Prudential as being in an Alliance Account exclusively for the benefit of
the insurance beneficiary must be held in constructive trust for the beneficiary.
CLASS ALLEGATIONS
85. Plaintiffs bring this action pursuant to Rule 23(a), 23(b)(2) and (b)(3) of the Federal
Rules of Civil Procedure on their own behalf and on behalf of a class of all other persons similarly
situated.
86. The named Plaintiffs seek to represent a certified plaintiff class consisting of all
persons who were beneficiaries of SGLI, VGLI, FSGLI and TSGLI insurance benefits and whose
benefits were designated to be paid as a “lump sum” and were instead retained by Prudential in a
Prudential “Alliance Account” from 1999 through the present.
87. Given the widespread nature of SGLI and VGLI, the number of Class members is so
numerous that joinder of all members is impractical. Because of the geographic dispersion of Class
members, there is judicial economy arising from the avoidance of a multiplicity of actions in trying
this matter as a class action.
88. Plaintiffs’ claims are typical of the claims of the Class because all members of the
Class were similarly affected by Prudential’s wrongful conduct. Plaintiff Phillips, like the other
Class members, has been deprived of her entitlement to all interest income lawfully due to her as a
result of the death of her family member who was a service member. The individuals represented by
VMFP have been deprived and will continue to be deprived of their entitlement to all interest income
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lawfully due to them as a result of the death of family members who were servicemembers or
veterans.
89. Plaintiffs will fairly and adequately protect the interests of the members of the Class
and has retained counsel competent and experienced in class litigation. Scott+Scott is an
experienced class action law firm, whose lawyers have litigated a wide range of consumer class
action lawsuits. Counsel for Plaintiff have the resources, expertise, and experience to prosecute this
action. Counsel for Plaintiff know of no conflicts among members of the Class.
90. The Class members share a number of questions of law and fact, including but not
limited to:
a. whether Prudential violated 38 U.S.C. §1970(d) and 38 C.F.R. §9.5;
b. whether Prudential violated its fiduciary duty to SGLI, VGLI, FSGLI and
TSGLI beneficiaries;
c. whether Prudential breached the terms of its insurance contracts with the U.S.
VA;
d. whether statements made to SGLI and VGLI beneficiaries and to service
members regarding FSGLI and TSGLI during the Class Period were false
and misleading;
e. whether and to what extent Prudential earned interest on the retained funds,
and whether it fraudulently withheld this information from beneficiaries;
f. whether Prudential wrongfully interfered with benefits over which
beneficiaries were entitled to legal ownership and possession;
g. whether beneficiaries have suffered damages, including compensatory and
special/consequential damages; and
h. whether and at what time Prudential held benefits under the Four Programs in
constructive trust for the benefit of beneficiaries.
91. Class action is also appropriate because prosecuting separate actions by individual
Class members would create a risk of inconsistent or varying adjudications with respect to individual
Class members that would establish incompatible standards of conduct for Prudential.
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92. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder is impracticable. Furthermore, the damages suffered
by each individual Class member may be too small relative to the burden and expense of individual
litigation to support individual actions. There will be no difficulty in the management of this action
as a Class action.
FIRST CLAIM
VIOLATION OF 38 U.S.C. §1970(d) AND 38 C.F.R. §9.5
93. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
94. 38 U.S.C. §1970(d) and 38 C.F.R. §9.5 require Prudential to pay the full amount of
life insurance benefits to SGLI and VGLI beneficiaries who chose “lump sum” payments and to pay
the full amount of benefits due and owing to service members under FSGLI and TSGLI,
respectively, who suffer the death of a spouse or a child or suffer traumatic injuries.
95. In violation of 38 U.S.C. §1970(d) and 38 C.F.R. §9.5, Prudential unilaterally created
a third settlement option for distribution of SGLI, VGLI, FSGLI and TSGLI benefits by way of the
Alliance Account and failed to make the required payments in the manner required by statute and
regulation.
96. Prudential’s Alliance Account allowed Prudential to unlawfully retain funds that it
was legally and contractually required to disburse to the beneficiaries.
97. Prudential’s misconduct caused Plaintiff Phillips and the Class members to suffer
monetary loss of an amount to be proven at trial.
98. Wherefore, Plaintiffs seek relief as set forth below.
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SECOND CLAIM
BREACH OF CONTRACT
99. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
100. This claim is brought under federal common law.
101. Plaintiff Phillips and the Class members are intended third-party beneficiaries of all
SGLI, VGLI FSGLI and TSGLI insurance contracts between Prudential and the United States.
102. The SGLI, VGLI, FSGLI, and TSGLI insurance contracts required Prudential to pay
the full amount of the life insurance benefit to SGLI and VGLI beneficiaries who chose “lump-sum”
payments.
103. Prudential breached these contracts by failing to make these required payments and
instead place life insurance benefits in Alliance Accounts, where the funds were maintained in
Prudential’s general account primarily for Prudential’s benefit.
104. As a result of this breach, the SGLI beneficiaries were unable to receive interest due
and owing on the insurance proceeds, nor take advantage of time-sensitive HEART Act benefits of
contributing the SGLI benefits to contribute those funds to a Roth IRA or Coverdell Education
Savings Account without regard to the ordinary income limits of contribution limit.
105. Prudential’s breaches of contract with the U.S. Veterans Affairs denied Plaintiff
Phillips and the Class members the benefit of the bargain to which they were intended beneficiaries
and caused damage in an amount to be proven at trial.
106. Wherefore, Plaintiffs seek relief as set forth below.
THIRD CLAIM
BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
107. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
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108. This claim is brought under federal common law.
109. Plaintiff Phillips and the Class members are intended third-party beneficiaries of all
SGLI, VGLI, FSGLI and TSGLI insurance contracts between Prudential and the United States.
110. The SGLI,VGLI, FSGLI and TSGLI contracts entered into by Prudential for the
benefit of the Class members contained an implied covenant of good faith and fair dealing which
required Prudential to act in good faith and not to place its own interests ahead of those of the
Plaintiffs and the other Class members.
111. By engaging in the conduct alleged herein, Prudential has breached its implied
covenant of good faith and fair dealing.
112. Prudential’s breach of the implied covenant of good faith and fair dealing cause
Plaintiff Phillips and the other Class members monetary loss in an amount to be proven at trial.
113. As a result of Prudential’s breach of the implied covenant of good faith and fair
dealing, Plaintiff Phillips and the other Class members are entitled to an order requiring
disgorgement of all income or other amounts made or earned by Prudential through use of the Class
members’ money.
114. Wherefore, Plaintiffs seek relief as set forth below.
FOURTH CLAIM
BREACH OF FIDUCIARY DUTY
115. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
116. This claim is brought under federal common law.
117. Prudential was a fiduciary of Plaintiff Phillips and the members of the Class, who are
all beneficiaries of SGLI, VGLI, FSGLI or TSGLI. As such, Prudential owed Plaintiff Phillips and
the Class the duties of full disclosure, loyalty and candor in all matters concerning SGLI, VGLI,
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FSGLI and TSGLI, and Prudential held the entire amount of SGLI, VGLI, FSGLI or TSGLI funds
and any and all interest on these funds as a trustee for the benefit of the beneficiaries.
118. Prudential, as constructive trustee to beneficiaries breached its fiduciary duties of
loyalty, good faith, and candor, by putting its own interests above those of the beneficiaries,
including by, inter alia: (a) retaining funds that Prudential was legally and contractually required to
distribute to beneficiaries immediately; (b) knowingly and intentionally omitting material
information regarding the nature of Alliance Accounts; (c) knowingly and intentionally misstating
material information regarding the nature of Alliance Accounts; (d) misappropriating interest that
belonged to the beneficiaries to itself; and (e) intentionally not disclosing to beneficiaries that
Prudential was earning interest off the benefits, nor the extent of Prudential’s misappropriation.
119. Plaintiffs, on behalf of themselves and the Class, seeks the appropriate remedy where
a fiduciary improperly gains at the expense of its beneficiaries and that is to require Prudential to
disgorge all the interest income wrongfully taken.
120. Wherefore, Plaintiffs seek relief as set forth below.
FIFTH CLAIM
UNJUST ENRICHMENT
121. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
122. This claim is brought under federal common law.
123. Through the conduct described above, Prudential unjustly enriched itself by delaying
payments of insurance benefits to SGLI and VGLI beneficiaries and service members entitled to
FSGLI and TSGLI and by taking a portion of the interest income earned on the beneficiaries’ monies
to itself.
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124. Prudential’s retention of a portion of the interest income (and indeed as much as ten
times as much of the interest income as was given to the beneficiaries) was unconscionable and
wrongful.
125. All the investment income rightly belongs to SGLI and VGLI beneficiaries and
service members entitled to receive FSGLI and TSGLI benefits who should have been paid the full
amount of insurance benefits and had the opportunity to earn investment income.
126. Prudential’s acceptance of this benefit belonging to Plaintiff and the Class was
deliberate and knowing.
127. Plaintiff Phillips and the Class seek all appropriate equitable relief for Prudential’s
unjust enrichment including disgorgement of income or profits made by Prudential and restitution of
Defendants’ wrongfully taken profits and revenues in a manner established by this Court.
128. Wherefore, Plaintiffs seek relief as set forth below.
SIXTH CLAIM
FRAUD
129. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
130. This claim is brought under federal common law.
131. As described herein, Prudential has made numerous false and misleading
representations to Plaintiff Phillips and the Class including that the Alliance Accounts were separate
bank accounts in the names of individual SGLI, VGLI, FSGLI or TSGLI beneficiaries. In fact,
monies held in Alliance Accounts were held in Prudential’s own account, were invested for
Prudential’s benefit, were not in a bank, were not FDIC-insured and were not earning competitive
interest rates.
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132. As described herein, Prudential has made numerous omissions of material fact
necessary to make its representations and statements to the Plaintiff and the Class not misleading.
For example, at no time does Prudential meaningfully disclose that:
a. the funds are not held in any separate bank account;
b. that Prudential unilaterally determines the beneficiaries’ rate of interest;
c. that Prudential is also making interest on the benefits; or
d. that Prudential may make up to ten times the rate of interest that beneficiaries
will.
133. As the designer and operator of Alliance Accounts, Prudential knew that its
statements were false and knew that its withholdings of material information would mislead and
defraud the beneficiaries.
134. Prudential made these false and misleading statements and omissions with the
intention of inducing Plaintiff Phillips and the Class to leave life insurance proceeds in the Alliance
Accounts so that Prudential could unjustly enrich itself from these monies.
135. Plaintiff Phillips and the Class reasonably relied on Prudential’s statements to their
detriment.
136. Prudential’s false and misleading statements and material omissions caused Plaintiff
Phillips and the Class to suffer monetary loss of an amount to be proven at trial.
137. Wherefore, Plaintiffs seek relief as set forth below.
SEVENTH CLAIM
CONVERSION
138. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
139. This claim is brought under federal common law.
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140. Pursuant to federal law and contract, Plaintiff Phillips and the members of the Class
were owed certain life insurance benefits under SGLI, VGLI, FSGLI and TSGLI.
141. Pursuant to federal statute, regulations and contract, the entire life insurance benefit
was owed to those survivors who opted for a lump-sum payment immediately upon the death of the
service member or veteran.
142. Prudential wrongfully exercised dominion over these life insurance benefits through
the artifice of Alliance Accounts.
143. As a result of Prudential’s conversion, Plaintiff Phillips and the Class suffered
damages in an amount to be determined at trial.
144. Wherefore, Plaintiffs seek relief as set forth below.
EIGHTH CLAIM
VIOLATION OF N.J.S.A. 56:8-2
145. Plaintiffs repeat and re-allege each and every allegation contained above as if fully set
forth herein.
146. This claim is brought under New Jersey state law.
147. New Jersey Consumer Fraud Act, N.J.S.A. §56:8-2 (“New Jersey CFA”) imposes a
duty upon Defendants, not to deceive consumers regardless of the fact that the particular subject
matter of Prudential’s deception, insurance to servicemen and veterans, is highly federally regulated.
State law claims like the CFA that are predicated on the duty to not deceive are not preempted by
federal law.
148. Prudential is incorporated in the State of New Jersey, is headquartered in the State of
New Jersey and the misleading statements made to Plaintiff and the Class all emanated from
Prudential’s OSGLI’s office in the State of New Jersey. New Jersey has a substantial governmental
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interest in ensuring that its corporate citizens behave in such a manner as to comply with its laws,
including the New Jersey Consumer Fraud Act.
149. The deceptions made by Prudential that run afoul of the New Jersey CFA are the
statements or reasonable implications from the statements include:
a. the beneficiary’s funds are segregated in the Alliance Account;
b. the beneficiary’s ability to draw down the funds operates like a
checkbook;
c. the Alliance Accounts are FDIC-insured and protected from loss, and
d. interest earned on the Alliance Accounts is competitive.
150. The omissions made by Prudential that are necessary to make its representations and
statements to the Plaintiffs and the Class not misleading so as to comply with the New Jersey
Consumer Fraud Act include:
a. that Prudential unilaterally determines the beneficiaries’ rate of interest;
b. that Prudential is also making interest on the benefits; or
c. that Prudential may make up to ten times the rate of interest that beneficiaries
will.
151. Plaintiff Phillips and members of the Class have suffered a readily ascertainable loss;
in the amount of interest income that Prudential misappropriated from Plaintiff Phillips and Class
member’s Alliance Account.
152. Prudential’s misleading scheme to convince Plaintiff Phillips and the Class to act
against their interest and allow Prudential to enrich itself from life insurance benefits due to them
constitutes unconscionable commercial practice in violation of N.J.S.A. 56:8-2.
153. Wherefore, Plaintiffs seek relief as set forth below.
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PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, on behalf of themselves and the Class members, pray for judgment
as follows:
A. Certify the Class;
B. Enter a class-wide judgment declaring that the acts and practices of Prudential are in
violation of the laws of the United States;
C. Enter a class-wide judgment declaring that the acts and practices of Prudential are in
violation of the New Jersey Consumer Fraud Act;
D. Issue a permanent injunction prohibiting Prudential from retaining insurance benefits
for the Class under SGLI, VGLI, FSGLI and TSGLI in Alliance Accounts instead of disbursing the
funds as required by law;
E. Award compensatory damages in favor of Plaintiff Phillips and the Class members
against Defendants for all damages sustained as result of Defendants’ wrongdoing, in an amount to
be proven at trial;
F. Award all extraordinary, equitable, and/or injunctive relief as permitted by law and
equity;
G. Award disgorgement;
H. Order Defendants to make restitution into a common fund or a constructive trust of all
profits and interest made as a proximate result of Defendants’ unlawful and inequitable conduct
alleged herein;
I. Award reasonable costs and expenses incurred in this action, including counsel fees
and expert fees;
J. Award treble damages pursuant to the New Jersey Consumer Fraud Act; and
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K. Award such other further relief as this Court may deem just and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: November 3, 2010 s/ Carl Beckwith
BECKWITH & WOLF, LLP
Carl Beckwith (CB 9044)
1 Closter Commons #181
Closter, NJ 07624
Telephone: 201-338-2833
ccbeckwith@gmail.com
and
SCOTT+SCOTT LLP
CHRISTOPHER M. BURKE (214799)
PENELOPE ABDIEL
707 Broadway, Suite 1000
San Diego, CA 92101
Telephone: 619/233-4565
619/233-0508 (fax)
cburke@scott-scott.com
and
SCOTT+SCOTT LLP
JUDY S. SCOLNICK (JB 0827)
THOMAS L. LAUGHLIN IV
500 Fifth Avenue, 40th Floor
New York, NY 10110
Telephone: 212/223-6444
212/233-6334 (Fax)
jscolnick@scott-scott.com
tlaughlin@scott-scott.com
Counsel for Plaintiffs
37
